According to some housing-market soothsayers, we are now seeing a peak in housing construction and sales. Now, they aren’t talking about a downturn yet — just a peak. What’s going on? Does this mean a mild recession, or worse, lies around the corner? After all, housing is a major economic driver.
The housing tea leaf readers could be right, considering the slowing housing economy seems to be the result of higher-cost construction materials generated by trade-war tariffs, rising wages associated with tighter immigration policies, and higher-cost money, which is just what the Fed has been hoping for.
In other words, if housing swoons it will be thanks to our Washington leaders. This is just what they ordered.
Moving to the larger and more important picture, let’s cut to the chase and take a look at the potential for recession. Is the basic economy so fragile that a housing slowdown poses a serious danger?
I don’t think so. Take a look at the data.
The Federal Reserve Bank of Kansas City maintains a Labor Market Conditions Indicator for the United States that may help to identify the prospects for another recession. Remember that Gross Domestic Product is always the result of people at work. More people working, and working smarter, means higher GDP.
The KC indicator has two components: One reads the level of overall labor market activity and the second reads momentum. Each component is based on a dozen labor market variables. Taken together, the data provide a picture of performance and the amount of steam that is pushing our engine forward. Consider the adjacent chart, which gives a plot of the twin indicators for the period January 1992 through August 2018. The chart also identifies two shaded recession periods.
Let’s focus on the red line first, which reflects the current level of activity. It shows labor activity accelerating from a low point after the 2009 recession with the pace picking up in the most recent period. Not a whiff of recession here.
Now consider the blue line, which reads momentum. It has been in positive territory since 2010, and is at its highest level since 1992. Apparently, there’s plenty of steam in the labor market engine.
Finally, notice that both indicators turned downward before the shaded recessions started. We see nothing like that in the current period. Therefore, let’s not conclude that housing activity, which very well may be hitting its peak and slowing down from the recent highs, means we’re headed for a recession.
Nonetheless, why not chase away the clouds? Tariffs, tighter immigration policy, and Fed interest rate increases were implemented deliberately by our political leaders and appointees, so each can be altered, softened, or eliminated.
Housing slowdown and recession? It’s strictly a political choice.
Bruce Yandle is a contributor to the Washington Examiner's Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University, dean emeritus of the Clemson University College of Business and Behavioral Science, and a co-author of September’s “The Economic Situation” policy brief.